Yes. A note secured by commercial property can be sold, and the buyers for it tend to be specialists in commercial paper. They price it on the property’s income and its tenants as well as on the payer, and their review takes more documents than a house note does.
What counts as commercial
Commercial is one of the types of note defined by the property. To a note buyer it means property used for business or held for income: retail units, offices, warehouses, restaurants, auto shops, self-storage, mixed-use buildings and larger apartment buildings. Where the line falls between a small residential rental and a commercial apartment building varies from one buyer to the next, and it decides whether yours is handled with the commercial mortgage notes or with the residential ones.
The property as a business
Any note buyer works from the return they need for the risk. On a house note the risk questions concern the payer and the home’s value. A commercial note adds a third subject, the property as a business.
The buyer asks whether the property earns enough to cover the payment. If it is rented, they compare the rent coming in, after expenses, with the note payment. If the payer runs their own business from it, they look at how that business is doing. They ask who the tenants are and how long the leases run, since a long lease to a stable tenant is stronger than a month-to-month occupant or empty space. They consider how easily the building could be re-let or resold, which is where property type and condition feed into note value: a plain warehouse suits a wide range of users and a building fitted out for one trade suits few. Last comes value, which on commercial property follows income and local demand, so expect a request for an independent valuation.
Features that come up on commercial notes
Balloon payments
A commercial note may be written as a balloon note: regular payments for a few years, then the whole remaining balance due at once. A buyer has to judge whether the payer will be able to refinance or pay on that date, and a balloon that is close can help or hurt the price depending on that judgment.
Who signed
The payer may be a company, such as an LLC. A buyer will then ask whether an individual also signed a personal guarantee, a promise to pay if the company does not. A personal guarantee from someone with real assets makes for a stronger note than one where the only obligor is a company that owns nothing but the building.
Environmental history
Past uses such as fuel sales, dry cleaning or manufacturing can leave contamination, and cleanup duties can follow the property. Buyers are careful with these and may ask for an environmental report, so one from the time you owned the property is worth finding.
What a buyer will ask for
- The note, the recorded mortgage or deed of trust, and any personal guarantee.
- The closing statement from your sale, showing price and down payment.
- Your payment history.
- Current leases and a rent roll, which is a list of tenants, spaces, rents and lease end dates, if the property is rented.
- Proof of property insurance naming you as lender, and paid property taxes.
- Any appraisal, survey or environmental report you hold.
A commercial buyer cannot judge the property’s income without the leases or rent roll, so have those attached when you send us the note details. If the payer manages the property you may not hold them, though your loan documents may give you the right to request them. All of this comes on top of what a buyer checks before funding any note.
What to expect from the process
A commercial review means more reading and more third-party reports than a single-family note, so allow more time for it. The pool of buyers is smaller, and each has preferences on property type, location and size. Offers can therefore sit far apart, and a note one buyer declines may suit another well.
A partial purchase, where you sell a set number of upcoming payments and keep the rest, is possible on some commercial notes. On a note with a balloon it has to be structured around that date.
If the building is full and the payer is on time
Then keeping the note is a sound choice, particularly if you like the income. While you hold it, ask the payer for an updated rent roll each year where your loan documents allow it, and keep the date of any balloon in view. A note with current tenant records and a known payoff date is easier to price later, should you change your mind.
Related questions
Does a vacant commercial building make my note unsellable?
No, but it changes the picture. With no rent coming in, the buyer relies on the payer's other resources and the building's resale value. Expect fewer bidders and more questions about how the payer is covering the payment.
Will a buyer need to inspect the property?
Expect them to want a current valuation, which can involve someone visiting the site. Who arranges and pays for reports differs between buyers, so ask before you accept an offer and check that it appears on the worksheet.
Can I sell a commercial note where the payer is an LLC?
Yes. The buyer will ask for the company's signing authority and whether anyone gave a personal guarantee. A personal guarantee from someone with assets generally strengthens the note.